Calculate Your 2018 Federal Tax Under the New Law

Hello and Welcome to my first News Letter on Matters That Will, Almost Certainly, Affect You in This New Year, 2019.

I know that 2018 was a difficult year and now with the traumatic effect of the U.S. Government Partial Shutdown with the stock markets swings to record lows, we are facing a much higher tax liability for our personal US Tax Returns for 2018.

A lot of deductions we historically were allowed in recent past years have been revised for tax years beginning in 2018 and there is for the most part little that we can do to mitigate the increased tax liabilities. We can, however, calculate our expected tax increase and make a 4th Quarter Estimated Tax Payment by no later than 15th January 2019 for the 2018 tax year. This payment will act to compensate for the unlimited Sales Tax and Property Tax we had enjoyed and now the limited Sales Tax and Property Tax we can claim for last year.

We are pleased to offer our services to calculate your 2018 Federal tax under the new law if one of the items mentioned below will affect your Itemized Deductions on Schedule A. You will only have until 15th January 2019 to actually make the 4th Quarter payment, so please review the remainder of this News Letter and call me if you would like us to make this revision calculation of your 2018 tax liability based on the new law as applied to your 2017 income.

All my best for your 2019 year and we continue to be available to help you with your intelligent tax planning.

I. Elimination of Personal Exemption

While the near doubling of the standard deduction is beneficial, it comes with a cost: the deduction for personal exemptions. For 2017, the personal exemption was $4,050 each; it is suspended for tax years 2018 – 2025.

II. Enhancement of Child Tax Credit

The Tax Reform increased the child tax credit to $2,000 per child under the age of 17 and added a $500 credit per non-child dependent. Additionally, the phase-out threshold increased to $400,000 for married filing jointly ($200,000 for everyone else). Like many other individual tax changes, this enhanced credit only lasts from 2018 – 2025.

III. Mortgage Interest Limitation

Farewell to the home equity line of credit (second mortgage) interest deduction…for now. While the Tax Reform generally preserves the first mortgage home interest deduction, there are two significant changes effective for tax years 2018 – 2025 of which to be mindful.

The Tax Reform lowers the home “acquisition indebtedness” limit to $750,000 ($375,000 for married taxpayers filing separately), down from $1 million ($500,000 for married taxpayers filing separately). This limitation applies to debt incurred after December 15, 2017.The deduction for interest paid on certain types of home equity line of credit (HELOC) is suspended.

IV. State and Local Tax Limitations

The deductions for state and local real property taxes, personal property taxes, and general sales taxes (if elected) are combined and limited to $10,000 total ($5,000 for married taxpayers filing separately) for tax years 2018 – 2025.

It’s worth noting that the $10,000 aggregate limitation rule does not apply to taxes paid and associated with carrying on a trade or business activity. So deductions continue to be allowed for state and local taxes paid related to an individual’s Schedule C, Schedule E, or Schedule F activity. For example, an individual’s bona fide rental property — even if not held by a separate business entity — remains deductible and not subject to the $10,000 limitation.

V. Other Notable Changes

Additional changes effective for tax years 2018 – 2025, include:

“Miscellaneous itemized deductions” are no longer allowed.The prior 3% phase-out of certain itemized deductions (the “Pease limitation”) is removed.Personal casualty losses are non-deductible unless attributable to a federally declared disaster.Charitable deduction is denied for contributions to a college or university in exchange for athletic event seating rights.

One other notable change that does not sunset in 2025:

The Affordable Care Act’s individual mandate penalty imposed for individuals not having health insurance is repealed beginning in 2019.

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About Us

Michael B. Nelson

The Law Office of Michael B. Nelson, Inc. continues to assist foreign financial institutions, FFI, and their customers who fall under the rules of the Foreign Account Tax Compliance Act, FATCA; additionally providing guidance concerning the treatment of financial institutions located in jurisdictions that have signed intergovernmental agreements for the implementation of FATCA (IGAs) but have not yet brought those IGAs into force.